Investors’ interest in secondary and tertiary apartment markets increases

Due to limited inventory in primary markets and growing demand for rentals in smaller markets, capital has moved to tertiary markets for elevated yields, according to Marcus & Millichap’s Midyear 2018 Apartment Outlook report.

Secondary and tertiary markets are dominating sales activity, claiming more than 50 percent of trades and dollar volume since 2016.

The increased competitive bidding occurring now in all markets has placed downward pressure on first-year returns, with the strongest decline in

tertiary markets as more investors seek assets in these locations. Here, returns have fallen 160 basis points, averaging 6.3 percent in the second quarter, according to the report. The decline has slashed the spread between primary and tertiary markets from nearly 300 basis points in 2012 to 140 basis points at midyear.

High levels of construction activity in the past few years have heightened concern regarding oversupply as well, according to the report. Yet, demand has kept pace with inventory growth over the past five years and apartment vacancy remains near a cyclical low first achieved in mid-2015.